Financial Ratios versus Data Envelopment Analysis:

Abstract

The paper examines the efficiency of banking sector in the Bahrain Bourse (2010-2013) using financial ratio analysis (FRA) and data envelopment analysis (DEA). For FRA, the current study has used six ratios to evaluate three characteristics of banks efficiency (profitability; liquidity and risk). The results of FRA do not provide sufficient and complete information on the efficiency of banks. The results of DEA in the current study are obtained through a software namely DEAP 2.1 version. Under this approach, the findings have revealed that 2 banks only are fully efficient in the period (2010 -2013). Besides, other banks are found inefficient with technical efficiency scores less than one. A major advantage behind using DEA approach to measure performance is to identify opportunities for possible efficiency improvements by looking at the differences between efficient banks and inefficient ones. DEA identifies the quantities of inputs that should be reduced and the quantities of outputs that should be increased to improve efficiency for banks with technical score less than one.